Recent articles on cash concentration appear to be sounding
the death knell of notional pooling, arguing that regulatory, tax, and
accounting issues are making it increasingly difficult.
Notional pooling remains the most elegant and cost effective way to concentrate
cash for most corporate. Before explaining why, let’s clarify some terminology.
Sweeping – also known as zero balancing (ZBA) and physical pooling –
involves moving money from sub accounts to a designated master account.
Basically, treasurers outsource to banks the daily money transfers that they
might otherwise carry out manually.
Just like manual money transfers,
sweeping creates intercompany loans which, in turn create accounting
requirements (they must be booked in the general ledger (G/L)) and tax
consequences (such as withholding tax and thin cap rules).
notional pooling, as its name implies, is purely notional. No money moves, each
participant’s bank balance remains untouched and there are no intercompany
Notional pooling is basically an agreement that your bank will not
charge interest on gross debit balances, nor pay interest on gross credit
balances. Instead the bank agrees to pay interest on the net credit balance only
(notional pools are normally run in a net credit balance). This saves the spread
between the bank’s debit and credit interest rates, which is normally the sum of
market spreads plus the bank’s cost of capital plus the corporate’s credit
Of course the bank needs to be able to avoid the cost of capital
on the gross balances, which means that regulators who decide capital allocation
drive the rules of notional pooling. In many countries regulators require banks
to obtain a cross guarantee, whereby each notional pool participant is liable to
the extent of its credit balances for the debit balances of its fellow
participants. Other techniques, such as pledges, are also possible.
Sweeping and notional pooling are not mutually exclusive. They can be – and
often are – combined in an overlay structure. A cash concentration or liquidity
management overlay structure normally sweeps from operating accounts at
different banks and different locations to an account owned by the same legal
entity (so no intercompany loans) with the notional pooling bank.
are some things that simply don’t work with sweeping. For example, the plethora
of overnight currency swaps required to conduct multi-currency cash
concentration with sweeping are not cost effective. Multi-currency notional
pools (MCNP), on the other hand, provide an elegant and easy to operate solution
by allowing cross currency balance offset without conversion.
Tax and Accounting Rules
So what is driving the alleged demise of notional
pooling? The first issue is the wave of regulation hitting banks, notably the US
Dodd-Frank Act and the Basel III capital adequacy regime. Regulators in some
countries are tightening their requirements for allowing banks to report net
balances rather than gross balances (which is required to make notional pooling
cost effective). In some cases, they require sweeping cross-guarantees and will
not accept guarantees limited to participants’ credit balances. Some regulators
are also asking for parent company guarantees. The topic extends beyond bank
regulation per se to, for example, bankruptcy law (i.e. what is the liability of
a participant in a bankruptcy situation?).
The situation is compounded by
regulatory vagueness in many countries. To avoid liability, some regulators
refuse to specify exactly what is permitted. This places bank compliance
departments in a difficult position and often makes them choose differing and
conservative interpretations, to avoid regulatory liability to the bank.
But ‘some regulators’ is not the same as ‘all regulators’. Some regulators
allow non-guarantee support for notional pooling arrangements, are willing to be
explicit and even give written opinions on capital arrangements. As a result,
the old maxim that all global banks offer pretty much the same cash management
services is no longer true. So it is crucial that treasurers understand the
nuances of different notional pooling techniques and dive deeply into bank
capabilities with appropriate legal and tax support.
A second issue
driving the alleged demise of notional pooling is tax. The logic runs as
follows: since many tax authorities deem third party loans covered by related
party guarantees as intercompany, and since notional pools need
cross-guarantees, notional pooling is not tax-effective.
The error here
lies in the second statement. As treasurers now know, notional pools do not need
cross-guarantees, or any guarantees at all. Some banks need cross-guarantees to
meet their regulatory requirements, while others can use other techniques such
A knock-on issue here is that few tax advisers really
understand notional pooling. They therefore tend to take a conservative view and
pronounce it tax ineffective. I have seen tax partners within the same office
disagree on this point. So it is critical to have good advice and robust support
for your case – and even to find tax advisers who have already OK’d notional
pooling to explain to their peers.
The bottom line is that hundreds of
multinational corporations (MNCs) are happily using notional pooling for cash
concentration and tax effective subsidiary funding – although as the author is
not himself a tax adviser, treasurers need to carry out their own due diligence
A third issue driving the alleged demise of notional pooling is
accounting rules. The idea here is that International Financial Reporting
Standards (IFRS) – specifically IAS32 – requires periodic physical offset of
balances if you want to net pool balances in your financial reporting. Again it
is a matter of choosing the right bank and market leaders provide a service to
physically offset balances (with a two way sweep) whenever required by your
auditors. The requirement varies because this is another issue on which
individual auditors differ.
In summary, on closer
inspection all three issues are not intrinsic with notional pooling. Rather they
are issues that specific banks may have because of the regulatory and/or system
The first problem, of regulation, is specific to banks whose
regulator requires cross guarantees or more.
The second problem, of tax,
is specific to banks whose regulator requires cross-guarantees.
problem, of accounting, is specific to banks whose systems do not support
periodic physical offset by two way sweep.
Therefore, I maintain my
opinion that notional pooling remains an elegant and effective solution for cash
concentration, subsidiary funding, and in the case of multi-currency notional
poolings (MCNPs) for foreign exchange (FX) risk management.
treasurers should beware bankers who sound the death knell for notional pooling.
Their arguments might be based more on their own constraints than on what works
best for their corporate customers.
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